Rotational Roars Ahead

Rotational combines
component rotation and asset class rotation to hold a small basket of ETFs
or ETNs, selecting the handful with the most momentum from a representative
sampling of classes and components. Throughout this article, when I refer to
momentum, I am referring to an exponentially smoothed measure based solely
on price movement.

Information is as of the close on May 30, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current
weights and holdings. The initial target was a buy of 10% weights per position.
See my
previous post on this system. Sort is alpha order by ticker and weights
are rounded to the tenth of a percent.

None of the ETFs in the Rotational portfolio
paid dividends or distributions in the past four weeks.

Total dividends = $0.00 on the tracking portfolio. This amount is included
in the returns shown above, and will remain in cash until needed for a new
purchase. Note, commissions are expensed at $10.00 per trade when accounting
for returns.

Changes To Model Allocation

Rotational screens
for momentum inside a list of ETFs and ETNs by asset class category. In previous
posts, the methodology had an element of "forced allocation" to different asset
classes, that is, provided that momentum is positive, one issue from each asset
class will be held, with the remainder of positions allocated to the issues
with the most momentum, regardless of asset class. My backtesting has revealed
that the system will perform better, albeit with higher volatility, if this
element of "forced allocation" is removed. Therefore, starting with the previous
post, the Rotational system
is holding the top 10 issues, ranked by momentum, regardless of which asset
class they are in or how much momentum they have.

If this system were to be initiated today, the target allocation would be
a buy for 10% weight holdings of the ten issues highlighted in gold or green
in the table below. Items highlighted in gray are "sells" from the existing
model portfolio.

If the table is truncated in your browser, click on it to view it in its own
pane. Depending on your browser, you may have to click again to view it in
full size.

Tracking

Shares of DBA, MOO, and SLV will be sold, market at open on Monday. The proceeds,
plus cash, comprise 26.7% of portfolio weight, and will be used to buy shares
of IGE, PXE, and RSX based on the closing prices on May 30. I will round down
any fractions in the share calculation.

Commentary

Below, I present the change in rotational momentum from the last evaluation
to the current one. It can be quite instructive.

Here is a table that shows the average momentum for the different issues in
each asset class, at different evaluation dates from the inception of the program.

Bonds, as an asset class on average, still have some positive momentum, but
notably the least momentum since I've been publicly tracking this system.
The largest negative change is in intermediate (7-10 years) U.S. Treasuries,
followed closely by international Treasuries and longer-duration (20+ years)
U.S. Treasuries. The short term (1-3 years) U.S. Treasuries have lost momentum
as well. The "flight to quality" is definitely over. Low-grade Corporate and
Emerging Market categories are the only bonds I track that are gaining
in momentum. One could say that the lowering in price for longer-duration
Treasuries is a response to "fear of inflation," but the look at commodities
may be instructive there.

The negative change in momentum for Commodities is the largest of any class. There
is still a large amount of positive momentum on my timeframe, but the drop
over the last eight weeks has been surreal. Agriculturals, Silver, Gold, and
Base Metals have all lost lots and lots of momentum, although Oil and Natural
Gas are still gaining. If the lowered prices and increased yields on long Treasuries
were the result of bubbling "inflation fears," why then would the metals and
agriculturals be losing steam? I suggest that a dissipation of fear,
rather than a replacement of one fear (economic collapse) with another ("inflation"),
is the real meaning of the movement away from Treasuries.

Currencies competing against the dollar are the third class that dropped momentum
as a group, losing more than bonds but not nearly as much as commodities. As
a whole they still have positive momentum on my timeframe - just not nearly
as much. The two biggest losers are the Swiss Franc and the Yen, and the biggest gainer in
momentum is the DBV "carry trade" tracker. This shows a clear dissipation of
fear, as the search for yield and the embrace of risk-taking has returned to
the market in spades. The Euro is the third-biggest momentum loser, perhaps
suggestive of a worsening outlook for Europe relative to the U.S., as the EMU
(I love that acronym) has been less responsive to the "credit crisis" than
the U.S. Fed has been.

Of the asset classes with significant increases in momentum, the foreign
stock markets are the second strongest gainers. Call the biggest gainers the
BRAAS, Brazil, Russia, Australia, Austria, and South Africa. Canada and China
are also big gainers in momentum. Looking at raw momentum, as opposed to four-week
change, Brazil and Russia lead, with a full 18 of the 25 foreign countries
I track having more momentum than the U.S. market. Only four of the nations
I track have negative momentum, and three of those are showing improvement.

The class with the biggest gain in average momentum was the domestic industry
stock group, although they just barely beat out the foreign countries. Note
I do an equal-weight class calculation, not an index-weight, so the U.S. overall
index-trackers didn't do as well. In the month since my last review, every
single domestic industry tracked, except for two, has gained in momentum. The
two non-gainers? Gold miners (again) and homebuilders. The biggest gainers
are telecom, the semiconductors, and almost anything related to energy and
raw materials. Semis are in positive momentum territory, as are wireless telecoms,
and the energy and materials industries have some shining stars among them.
The "safe" industries of health care and consumer staples did have momentum
gains, but only barely, nothing compared to the gains of the cyclicals, electronics,
or brokers industries. Whether or not a "recession" is actually coming, it
is pretty darn clear that the market is betting there isn't going to be
any "recession."

REITs gained in momentum again, although not as much as the other domestic
industries or the foreign markets. Their total positive momentum is now the
highest it has been since I've been publicly tracking this strategy. Residential,
Industrial, and Retail REITs all have positive measurements now, as well as
the overall U.S. REIT market. The biggest gainer in terms of momentum, although
still negative right now, were the Mortgage REITs, which may well have bottomed.
This class shows the confidence that "big money" has in the worst being behind
us.

It looks like that unwinding of the "recession trade" is continuing apace.

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